macroeconomic analysis vs. company analysis

There are two complementary approaches to trying to figure out the prospects for securities (both stocks and corporate bonds) and markets: analysis of economies (macroeconomic analysis) and analysis of companies and the industries they’re in (microeconomic analysis).

Around the world the favored–and much easier, in my view–path is macro analysis. It’s the focus of most academic training. There’s usually plenty of government-collected data available. And there are legions of sovereign bond analysts continuously assessing a given country’s performance as a way of gauging its creditworthiness and therefore its bond prices.

What has made the US unique over the 40+ years I’ve been watching markets–and the reason US equity investors have eaten everyone else’s lunch, has been its strong concentration on figuring out industry and individual company prospects. One or the reasons, I think, of the almost continuous underperformance of the hedge fund industry is that those firms’ principals generally have backgrounds in marketing and trading, not research or economics.

(an aside: one of the reasons for the failure of macro-only analysts is that there’s no reason to think that there’s a strong relationship between a country’s GDP and its stock market. GDP and banks, maybe (the traditional British approach). But not elsewhere. One simple example is the S&P 500, which consists completely of US-owned enterprises. About half the S&P earnings are derived abroad, however.)

I mention this because I’m struck by how much current US stock market seems to be influenced by macro data–strong GDP on the plus side, the increasingly negative effects of official pandemic denial in the South and Southwest, on the other. The ins and outs of individual company success and failure, the traditional heart of Wall Street, seem to be being ignored.

This creates an unusually good opportunity for individual stock pickers. One kind of company seems to be particularly interesting. It’s last year’s pandemic beneficiaries. These will, I think, separate into two cases: firms that had a gigantic one-time jump in sales in 2020 and are now beginning to come back to earth; and businesses that have found new customers who are sticking around even as the country starts to shift back to (what will pass for) normal.

I think there’s a potentially a big difference between companies whose profits doubled last year and are now reporting flat-to-down yoy comparisons and those who doubled in 2020 and are reporting up comparison. The latter is quite a feat, I think. Wall Street, or maybe just trading bots, seem to be lumping both together as cases of decelerating earnings gains–meaning stocks headed for trouble. That is usually the case, but 2020 was so unusual that I think dismissing the ability to make any higher earnings in 2021 is a mistake–that we can profit from by looking carefully.

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